Bank of America Merrill Lynch topped Latin
America’s debt capital markets issuance league
table for the first half of the year, according to data
provider Dealogic.

The region saw 40% less issuance than in the same period
last year – with the slump in Brazilian issuance to
blame for lower revenues.

However, analysis of the underlying data also illustrates
the challenges
investment banks in the region have for profitability, for
not only are volumes down but fees per deal have also fallen
substantially in the aftermath of the financial crisis in
2009.

According to Dealogic’s fee data, BAML
generated $1.49 million per deal for Brazilian issuers in 2009.
By 2014 that average had fallen by 46% in nominal terms
– to $800,000 per transaction.

The pricing pressures also hit other international banks.
For example, HSBC saw average fees for DCM fall by 50.9%
between 2009 and 2015 – from $1.16 million to
$570,000.

Of all the international banks in the top 10 in 2009 only
JPMorgan has maintained an average fee over $1 million: falling
a relatively modest 31% to $1.1 million from $1.6
million.

The bank’s selectivity on higher value work has
seen it lose market share in the same period, from a
market-leading 15.1% of issuance in 2009 to a fifth-ranked 7.5%
in 2014 – although in nominal terms the
banks’ volumes have been relatively stable in a
market that more than doubled.

$1.9 million

BNP
Paribas’ fees, the highest per deal in
the region

The only top 10 bank that increased its average fee over
these five years
was Citi, who earned $830,000 per deal in 2014, compared to
$760,000 in 2009 – and interestingly the bank also
managed to nudge up its market share in the same period (to
7.3% by volume, from 7.23%).

A Citi banker says this is because the bank has reorganized
its investment banking platform to be less product-specific,
"which enables discussions with clients about the range of
corporate funding options".

He argues this broader conversation – often taking
place with more senior management – "shifts the
emphasis away from pure transactional competition and makes
clients less price-sensitive".

Also noteworthy is BNP Paribas, which generated by the far
highest fees-per-deal, at $1.91 million, and despite not having
a presence in the market in 2009.

Compression

The reason for the compression in fees is clear:
international banks have had to lower their fees in response to
competition from locals. In 2014, Dealogic says that
Itaú BBA’s average fee was just $430,000,
lower than Bradesco BBI ($550,000) and Banco do Brasil
($800,000).

The local bank’s fees were broadly flat over
the five years (Itaú’s average fee was
exactly the same in 2009), showing that the competitive
environment in Brazil has been one in which the international
banks have had to lower fees closer to the locals, rather than
the locals being able to increase fees to match that they claim
to be a narrowing of the level of the service between.

The rich pickings have gone: for example JPMorgan managed to
generate an average of $7.96 million per deal on seven
transactions in Brazil in 2009 – even discounting for
last year’s exceptionally thin annual volumes
(Dealogic says the bank generated just $2.26 million on three
ECM deals last year), the bank’s average fee in
2013 was still under half the 2009 base, at $3.06
million.

This pricing competition has also negatively affected the
locals: BTG Pactual’s average fee fell from $4.45
million to $2.87 million. Santander has also suffered, with the
bank generating just $1.84 million per deal from $4.67
million.

The same dynamic is apparent in ECM transactions: in 2014
Itaú BBA topped the league table and generated an
average of $3.24 million per transaction – broadly
flat to its $3.37 million per deal in 2009 (when it was ranked
in sixth place).

Meanwhile, the fees for the international banks have
collapsed: Credit Suisse’s average fell by 63.5%
to $1.67 million from $4.57 million – a clear sign the
market has gravitated to the lower local fee levels.

The figures illustrate why some banks, such as Barclays and
Deutsche Bank have reassessed the potential of
Brazil’s equity markets during this period and
retrenched equity teams in the country.

Fallen prey

M&A bankers have also fallen prey to the race to the
bottom in fees: the system average per deal falling to $1.85
million per deal in 2014 from $3.6 million in 2009.

However, in this segment even some of the local banks have
seen a radical reduction in fees: Itaú generated on
average $970,000 for each of its 62 deals in 2014, compared
with $1.82 million on each of its 18 deals in 2009.

International banks have been forced to respond: Bank of
America Merrill Lynch generated $2.17 million for every M&A
transaction in 2014, compared with $3.23 million in
2009.

Citi again bucked the trend, increasing its average fee by
118% in the period, to $3.89 million from $1.78 million, while
also increasing its market share to 5.97% (from 4.45%).
However, the number of deals fell to just five in 2014, from 14
in 2009, showing the value that comes from working on larger
deals despite the increased resources that covering these deals
requires.

Further reading on Euromoney

Add Your Comment

All fields are compulsory

All comments are subject to editorial review as we are subject to the same regulations adhered to in publishing our own content. For this reason, your comment may not be live immediately, or may not be published.

Magazine

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies Policy before using this site.